Avoid These Mistakes When Building Home Equity

Equity grows when your loan balance falls or your property value rises, and your loan structure controls the first part.

If you own a home in Gordon Park, or plan to buy one, the choices you make on repayments, offset accounts and rate reviews decide how much of the property you actually own over time. Small structural mistakes can slow that down.

How Does a Home Loan Build Equity?

Equity is your property's value minus the amount you owe, so it grows when you repay principal or when the property value increases. You control the repayments. You do not control the market, and values can fall as well as rise.

Your loan to value ratio (LVR) measures this relationship. It is your loan amount divided by the property's value. As the ratio falls, you hold a larger share of the property. Lenders often price and assess loans differently at different LVR levels, so a lower ratio can widen your home loan options depending on the lender.

Mistake One: Keeping Savings Outside a Linked Offset Account

Savings held in an offset account reduce the balance your lender charges interest on, while the money stays accessible. Savings sitting in a separate account often earn interest at a lower rate than your loan rate, and that interest is taxable income, whereas the interest you save through an offset is not.

As an example, consider a Gordon Park buyer with an $800,000 owner occupied home loan over 30 years. At an illustrative rate of 6.75% p.a., the monthly repayment is about $5,189. Say they hold $60,000 in a linked offset account instead of a standard savings account.

Interest is then charged on $740,000 rather than $800,000. At the same illustrative rate, that is about $337 less interest in the first month, or roughly $4,050 across a year while the balance stays in the offset. If they keep paying the same $5,189, the extra amount goes towards principal, so the loan balance falls faster and equity builds sooner.

The trade-off is cost. Loans with an offset can carry a higher rate or an annual package fee, depending on the lender. The offset only pays off if your balance is large enough to outweigh those costs, so run the numbers with the mortgage repayment calculator before you commit.

Interest Only vs Principal and Interest: Which Builds Equity?

Principal and interest repayments build equity by reducing your loan every month, while interest only repayments leave the balance unchanged during the interest only period. With interest only, any equity growth comes from property value changes alone.

Using the same illustrative 6.75% p.a. rate on $800,000, interest only repayments are about $4,500 a month. The principal and interest repayment over 30 years is about $5,189. The gap is roughly $689 a month, and that gap is the amount going towards your loan.

Interest only has a place, for example when you are managing cash flow for a defined period. The cost is that when the period ends, repayments switch to principal and interest over the shorter remaining term. That makes them higher than the 30-year figure above, and you will have paid down none of the loan in the meantime.

Is Your Current Rate Slowing Down Your Equity?

A higher rate than you need sends more of each repayment to interest instead of principal. Reviewing your loan against what lenders currently offer shows whether a rate discount or a different structure could help.

Many borrowers stay on the rate they signed up to, even though a lender may offer a lower rate to a new customer. A loan health check is a way to review your current loan against other options. If a switch makes sense, refinancing can move you to a lower rate or add an offset.

Refinancing has costs. Exit fees, application fees and break costs on a fixed rate can reduce or cancel out the saving, so the comparison should include those costs. If your fixed term is ending, the fixed rate expiry page explains your choices.

A split loan is another option, where part of the loan is fixed and part is variable. It gives some repayment certainty and keeps some flexibility, though the fixed portion may limit extra repayments or offset use, depending on the lender.

How Can Equity Support Your Next Purchase?

Equity can help fund a deposit on your next property, but how much you can use depends on your lender's valuation, your income and your existing debts. Having equity on paper does not mean a lender will let you borrow against all of it.

If you are thinking about an investment property or a renovation, check your borrowing capacity before you plan around a figure. Borrowing against your home increases your debt, and your home becomes security for the new borrowing. If the investment underperforms, your home is still on the line. A broker can model that risk with you before you apply.

Talking to a local team helps too. Our Gordon Park mortgage broker page explains how we work with homeowners in the area.

Call one of our team or book an appointment at a time that works for you, and we will review your loan structure and show you where equity could be building faster.

Frequently Asked Questions